Help! [Concerned about Vanguard Long-term NY State bond fund]

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m02876
Posts: 4
Joined: Thu Dec 06, 2018 7:25 pm

Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by m02876 » Thu Dec 06, 2018 7:37 pm

Hi, I am a new member of this Forum, not by
choice, but by necessity.
I am very conservative with my money.
I keep a lot in cash and did not participate in
the long bull market.
I am a N.Y. State resident and in the highest
tax bracket.

My wife decided to put a large sum of
her/our money In Vanguard Long Term
NY State Admiral fund around a month ago.
I think the start of November 2018.
We don’t need this money now.

I am very concerned about this. This fund
has large fluctuations in NAV. It has never
been tested in a rate hiking cycle.

She wants our money producing income and not
sitting in the bank. But, I am very worried
about loosing capital.

Any advice/thoughts?

HEDGEFUNDIE
Posts: 1206
Joined: Sun Oct 22, 2017 2:06 pm

Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by HEDGEFUNDIE » Thu Dec 06, 2018 7:50 pm

This fund (in Investor class form - VNYTX) has been around since 1986, so it's not true that "it has not been tested in a rate hike cycle". From May 2004 to July 2006 the Fed raised rates from 1% to 5.25%. During that time the fund returned almost 5%/yr.

https://www.portfoliovisualizer.com/fun ... F01%2F2006

From the inception of the fund to present (32 years), it has never lost more than 12% from top to bottom.

So I think you can relax.
Last edited by HEDGEFUNDIE on Thu Dec 06, 2018 7:57 pm, edited 1 time in total.

m02876
Posts: 4
Joined: Thu Dec 06, 2018 7:25 pm

Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by m02876 » Thu Dec 06, 2018 7:55 pm

Thank you Hedgefundie for your insight.

Question, how can a fund like this have a positive Total Return in a rate increase cycle?

HEDGEFUNDIE
Posts: 1206
Joined: Sun Oct 22, 2017 2:06 pm

Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by HEDGEFUNDIE » Thu Dec 06, 2018 8:02 pm

m02876 wrote:
Thu Dec 06, 2018 7:55 pm
Thank you Hedgefundie for your insight.

Question, how can a fund like this have a positive Total Return in a rate increase cycle?
There is not a 1:1 relationship between the Fed raising rates and the bond market interest rate response. The Fed's action's are only one input, there are many other variables that go into economic growth forecasts, which is ultimately what drives the bond market.

Basically, you should not try to "time" the bond market by changing your bond durations based on what the Fed may or may not do. Your bond durations should be chosen based on your investment horizon. Will you need this money within the next 10 years? If not, a long term bond fund like this is probably fine for you.

m02876
Posts: 4
Joined: Thu Dec 06, 2018 7:25 pm

Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by m02876 » Thu Dec 06, 2018 8:05 pm

OK, thank you.
My anxiety level is noticeably decreasing .

HEDGEFUNDIE
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Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by HEDGEFUNDIE » Thu Dec 06, 2018 8:12 pm

Happy to help.

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vineviz
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Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by vineviz » Thu Dec 06, 2018 8:17 pm

m02876 wrote:
Thu Dec 06, 2018 8:05 pm
OK, thank you.
My anxiety level is noticeably decreasing .
The other piece is that there are two offsetting pieces of interest rate risk. People focus more on the price risk, but reinvestment risk is more potent for many investors. If you have a long investment horizon, the benefits of reinvesting coupons and maturing bonds at higher interest more than offsets the short term drop in bond price.

In brief, if your investment horizon exceeds the bond duration the yield increases are a net positive for you. Not a negative.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

m02876
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Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by m02876 » Thu Dec 06, 2018 8:31 pm

Vineviz, that is interesting. I think I understand.

So, my horizon
is the next 30 year—I’m in my 50’s and we
want to develop an income stream so that I can
go into semi-retirement in the next 5 years.
I want to decrease my income from work, but
have income from our money.

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grabiner
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Re: Help! [Concerned about Vanguard Long-term NY State bond fund]

Post by grabiner » Fri Dec 07, 2018 10:15 pm

m02876 wrote:
Thu Dec 06, 2018 7:55 pm
Question, how can a fund like this have a positive Total Return in a rate increase cycle?
When the price on a bond falls, the yield on that bond rises. However, the rates which the Fed sets are short-term rates; you are investing in long-term bonds, and bond traders trade those bonds at prices which reflect longer-term expectations.

In addition, the total return of a bond fund includes the dividends as well as the price change. The NY long-term bond fund has a duration of about 7 years, which means that the bond prices will fall 7% if the yield on its bonds rises by 1%. But if the fund's yield were to rise from the current 3% to 4% over the next two years, the 7% dividend return would cancel out the 7% price decline, and you would break even. If the rise over two years were less than 1%, the fund would have a positive total return.
Wiki David Grabiner

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